Orr likely to put tax on the table

Reserve Bank Governor Adrian Orr has responded vigorously to Finance Minister Grant Robertson’s plea that he pay mind to rocketing house prices, saying he’s likely to give open and frank advice on tax changes the Government could use to cool the housing affordability crisis.

In an interview with Stuff yesterday, Orr pointedly offered the view that “fiscal policy is far more effective” for making targeted interventions in the housing market than monetary policy but that it is “in the hands of elected officials”, not the bank.

Fiscal policy is the responsibility of the Government, not the Reserve Bank.

Orr welcomed Robertson’s letter on Tuesday which asked that the central bank consider changing its remit to include some consideration of house prices.

Orr said that he believed the letter requested the full gamut of the bank’s advice on the housing crisis. This means the solutions he comes up could be the responsibility of the bank, but they could also be Robertson’s.

Speaking at the Reserve Bank in Wellington, the governor was asked whether he’d use the opportunity presented by Robertson to suggest some taxes that might help relieve pressure on the housing market.

“I assume so – that’s how I’ve read the spirit of the letter,” Orr said. “There would be taxation [advice].

‘‘I think it would be remiss to, if the letter is open, not to put our best foot forward,” he said.

Robertson’s letter came as the Reserve Bank unveiled a $28 billion stimulus programme that Westpac economists believed might contribute to 15 per cent growth in house prices over the coming year.

Orr’s tax advice probably wasn’t what Robertson had in mind when he wrote to the bank requesting its help in confronting “the issue of rising house prices”.

The Reserve Bank is responsible for monetary policy, mainly setting interest rates through the OCR – it is operationally independent of the Government which controls fiscal policy and taxation. Most market watchers assumed Robertson’s letter would lead to Orr offering some monetary policy solutions to the crisis – these would be economic levers that Orr himself controls.

But Orr has been keen to emphasise that he sees his role as much bigger than just looking at what the Reserve Bank can do to take some heat out of the housing market. He wants to lend the bank’s considerable intellectual heft to give the Government policy advice on what it can do.

“I was very pleased that it’s an open letter, that is, it’s not constraining us to narrow remits of monetary policy but saying you’ve got a highly capable team here – help provide assistance and affordability solutions,’’ Orr said.

This could mean offering tax suggestions to a Government that has been quite clear it doesn’t want to implement them.

Prime Minister Jacinda Ardern has ruled out a capital gains tax, and a wealth tax, two potentially effective tax tools the Government could use to take some demand heat off the housing market. A land tax is also not on the political agenda.

Orr said that he’d have to speak frankly to the Government, despite its many ruled-out taxes.

‘‘I’m aware the Government has said publicly they’ve ruled certain things off the table,’’ Orr said. ‘‘But we’re going to have to speak openly, frankly and with integrity because that’s what the central bank has to do.’’

Orr said that using tools such as tax would be a more effective way to encourage housing affordability than blunt instruments like the Reserve Bank’s interest rate setting tools.

‘‘I think fiscal policy is far more effective around targeted intervention,’’ Orr said.

‘‘[Monetary policy] is a blunt tool and it is an effective blunt tool. If you want to get into certain sectors of society that’s regulation ... that’s fiscal policy and that’s in the hands of elected officials,’’ Orr said.